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Home / Is the minimum wage costing young Australians jobs?>CHECK THE FACTS

Minimum wages are often accused of reducing demand for young jobseekers. The evidence is less compelling.

The call for lower minimum wages is loud and unanimous within conservative policy circles. Milton Friedman once described minimum wages as a form of discrimination against the low-skilled. Since then, the rage against the minimum wage has only intensified. It is not surprising. If all you have is a hammer, everything looks like a nail.

It is true that young Australians are disproportionately represented in unemployment statistics. It is also true that Australia has a minimum wage. It is here that the relationship between the two breaks down.

In an opinion piece promoting the research, Dr. Carvalho argues that “high pay rates act as a strong disincentive for employers to create job positions for low-skilled, long-term unemployed youth.” The disincentive effect is left unquantified. Rather, Dr. Carvalho presumes the minimum wage to be the cause of youth unemployment, and then demands the problem be resolved with a lower minimum wage.

In economic theory, when prices go up, demand goes down. A minimum wage puts a floor on the price of labour. Wages can be set above the minimum; they cannot fall beneath it. For that reason, economic theory suggests that minimum wages lock willing people out of the workforce.

The theory is contentious and debate arond it is heated. Even those fully supportive of the simple labour market model have a hard time identifying the negative employment effects with any rigour. While there is furious theoretical agreement that minimum wages are causing unemployment, the empirical relationship between the two stubbornly refuses to materialise.

There is good reason why. The number of industries wherein a young, uneducated, inexperienced job-seeker could earn a wage is few and shrinking still. More than 40 per cent of employed people aged between 15 and 24 work either in retail, accommodation or food services.

These industries most likely to employ a young person are fiercely competitive. A restaurant will not open if it does not expect to make enough money to cover its costs. While a cut to the minimum wage may make a day of trading profitable, the restaurant next door, currently able to cover its wage costs, now has fatter margins with which to play.

In a competitive industry like hospitality or retail, a drop in cost to produce means a drop in price of that which is produced. The businesses which cannot maintain their wage costs will not benefit from a cut to their wage bill. They will be forced to either produce a higher-priced good than their competitor, or cut back on costs – namely, staff. The cycle is not broken by government intervention. The only salvation will come from productivity gains, allowing these firms to do more with less.

Once an article of faith, the presumption that minimum wages cause unemployment is unravelling amongst academic economists. The Productivity Commission’s recent Draft Workplace Relations Framework reviewed the economic literature surrounding the relationship between the minimum wage and unemployment in Australia. Its detailed review signalled little other than confusion: some papers found a lift in the minimum wage caused a distinct drop in employment, most found no effect, and some found a small, positive effect on overall employment.

It is tempting to believe a minimum wage reduction will deliver some relief. Yet if it does, it does so indiscriminately, and the market forces the proposal is so keen to let loose will ensure the promised boon of labour demand never eventuates. The drop in price would normally translate into an increase in demand for a product. In a perfectly competitive market – the existence of which the minimum wage debate presumes – the benefits are illusory. The increase in affordability is perfectly offset by the decrease in the consumer’s ability to afford things. Wages are an income as well as a cost, after all.

While the proclaimed winners of a cut to the minimum wage end up no better off at all, the losers are plain. The business provides no additional shifts, meaning there is no additional labour employed. Those young people who remain employed are simply compensated at a lower rate. With no boost to overall employment, and no boost to overall profitability, a reduction in the minimum wage ultimately amounts to a simple cutting of wages.

4 Responses

MSNovember 24, 2015 at 3:11 am ·

You overlooked the opportunity cost for those currently working in an industry with declining payrates. Since you want to look at basic economic principals, as the price lowers, entrants emerge into a market, but more importantly there are leavers that are unable to sustain their lifestyle at that rate. These leavers (skilled employees) are now capable of negotiating a higher lay, due to their higher productive efficiency.

PeterNovember 24, 2015 at 7:15 pm ·

Of course the question could be easily answered by trialling a lower minimum wage for a temporary period in a limited area. But if people started actually testing economic hypotheses then all the economists and commentators would be out of a job.

Tony ReardonNovember 30, 2015 at 9:26 pm ·

Good idea to test this but we don’t have to – the test has already been done by different rules in different countries. To quote:

The Economist wrote in December 2013: “High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world’s highest wage floor, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds.”

To quote an Australian Government web site:

“The level of the national minimum wage and the subsequent amount of employment it implies is essentially a societal choice.

A high minimum wage can be detrimental to the group of low-skilled or inexperienced workers it is designed to help. It can price many people out of the labour market and force them onto unemployment benefits or out of the workforce completely. Lack of employment opportunities prevents individuals from achieving their potential and reduces the productive capacity of the economy.

Younger workers currently make up a high proportion of people on the minimum wage. A high minimum wage may prevent younger people in particular from obtaining employment. … youth unemployment is currently around 12 per cent nationally, compared to the general unemployment rate of around 6 per cent. There are also large differences in the youth unemployment rates across States. For example, youth unemployment is around 17 per cent in Tasmania but around 10 per cent in Western Australia.”

PeterDecember 1, 2015 at 11:55 pm ·

Unfortunately data from different countries is fairly useless as there are way too many other variables to draw any valid conclusions.

Why

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Should the Australian government encourage renewable forms of energy or do we need to support fossil fuels? Is returning the budget back to surplus the number one priority and if so should be decrease spending or increase revenue? Should we focus on industrial relations or indigenous recognition?

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